Member Article

In Brazil the payment of profit sharing is regulated by Law # 10101/2000 (“Profit Sharing Law”), which sets the terms and conditions that the company’s plans have to meet in order to have such payments excluded from the basis of calculation of the mandatory labor benefits (vacation bonus, 13th salary, etc.) and the social security contributions. Among the conditions imposed by the Profit Sharing Law the following should be stressed: (i) the negotiations of the profit sharing plan has to involve the Employees’ Union (Article 2, I and II), (ii) the targets which the employees have to comply with cannot be discretionary, i.e., the company must stipulate objective targets (production level, EBITDA, etc.) (Article 2, §1º, I and II), and (iii) the payments of profit sharing shall not substitute the salary or other mandatory labor benefits and cannot be paid with an interval of less than six months or more than twice a year (Article 3).

The companies can negotiate its profit sharing plans with either (i) a special committee of the employees (provided that there is at least one member from the Employees’ Union), or (ii) through a Collective Bargaining Agreement, negotiated and filed directly with the Employees’ Union. Given that the Profit Sharing Law does not specify how the employees’ special committee should be appointed and there is no firm position in the court precedents on the matter, so as to avoid a dispute about the regularity and validity of a negotiation with such committee, today it is still advisable to have the profit sharing plan negotiated and approved through a Collective Bargaining Agreement. 

Recently, in the judgment of the internal appeal E-ED-RR - 2182/2003-465-02-40, the Superior Labor Court has confirmed the legality of a profit sharing plan, approved through a Collective Bargaining Agreement executed with the Employees’ Union, which authorized the company – the employer – to pay the profit sharing of a determined year in monthly installments. 

The 6th Panel of the Superior Labor Court had decided that such monthly payments should be considered salary, since the Profit Sharing Law prevents the employers from making monthly payments of profit sharing. Had that decision been confirmed, the company would have to pay all mandatory labor benefits and social security contributions calculated based on the amounts paid as profit sharing, which would constitute an additional payment of approximately 66% of the amount already paid. 

However, the Group of Panels of the Superior Labor Court (Subeção I Especializada em Dissídios Individuais do Tribunal Superior do Trabalho) granted the company’s internal appeal and reverted this decision based on constitutional principles that stimulate and support negotiations maintained with the Employees’ Union. 

This decision has to be interpreted with caution, as the Profit Sharing Law is still fully enforceable and there is a prohibition for monthly payments of profit sharing. Nonetheless, it is undisputable that this decision from the Superior Labor Court confirms a trend of allowing the employers and Employees’ Unions to progressively adjust the conditions of the employment relationship according to the specific cases and, sometimes, even set rules and routines that apparently could conflict with the law. Specifically with regard to the above mentioned decision, the authorization for monthly payments of profit sharing is especially important because it allows the companies to better plan such payments according to its cash flow and other particular internal issues. 

By affirming that the Brazilian Constitution preserves the autonomy and enforceability of the Collective Bargaining Agreements, the Superior Labor Court shows the path – with limits, of course – for the so required flexibility for adjusting the employment conditions according to the situation of the employer and/or the market. Although Brazil still urgently needs a complete review of its tax and labor laws, we have to recognize and appreciate that the Superior Labor Court is making an effort to, within its constitutional limitations, modernize the employment relations in order to prepare our country for the future.

 

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